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Monday, April 14, 2014

Natural Gas Mythology Faces Stiffest Test Yet

Note: This post continues our look at the U.S. natural gas market picture, which was turned upside-down by the coldest winter in a generation. It is my thesis that the “natural gas miracle” story leaves us unprepared for the day when inescapable geological and financial realities collide. --Michael Vickerman

The natural gas injection season has begun. Last week, EIA reported a net build of 4 billion cubic feet (bcf) in storage, raising inventories from 822 bcf to 826 bcf. One would have to go back to early 2003 to find stored natural gas levels this low.

Since the heating season began last November, a record-setting three trillion cubic feet (tcf) of natural gas was pulled out of storage to keep this country from freezing over during the 2013-2014 winter. That total is almost 50% larger than the 2012-2013 drawdown, which reflected a statistically average heating season.

The question arises: can injections of natural gas between now and early November bring storage volumes back to recent norms without a significant price increase? That is the question posed by Jim Hansen in his April 11, 2014, edition of Ravenna Capital Management’s Master Resource Report. While Jim’s newsletter is always worth reading, this issue in particular stands out in its comprehensive look at the dynamics affecting natural gas supplies for the remainder of this year. The opening paragraph sets up the discussion perfectly:

“Will shale gas be able ride to the rescue of natural gas storage by next fall and keep natural gas both cheap and abundant? The market for the last few weeks appears to be saying that supply will ride over the hill just in time to save the day. This week’s report looks at how likely it is the shale gas cavalry will show up and save the day.”

Jim’s superb discussion of this complex and evolving story leaves little room for embellishment or clarification. It’s worth pointing out, however, that we have already gone through three months of increased natural gas output this year, as projected by U.S. Energy Information Administration (EIA), yet still we find ourselves looking out of a three tcf hole. Marketed output this January exceeded last year’s totals by 4%. As impressive as that increase sounds, it was more than offset by the drawdown in supply that month. Ditto February and March. Whatever increase in output that occurred in those two months was wiped away completely by the record cold.

EIA predicts that storage levels will rebound by 2.6 tcf this year, leaving us with 3.4 tcf for the next heating season. Never before have energy companies managed to inject such a large volume of gas into storage in such a short period of time. Yet Wall Street’s reaction in facing up to this herculean task remains decidedly ho-hum. Traders are content to coast along with prices averaging 4.50/MMBtu. This is the sort of complacency that invites skeptics like myself to think about the all the unsinkable ships in history now in permanent residence on the ocean bottom.